Financial institutions investigate Blockchain in leading investment fund country
Scorechain is a Luxembourg-based bitcoin and blockchain solutions startup that entered the market with the release of the mobile bitcoin wallet, Yallet, last year. The company has since pivoted towards blockchain analytics, raising US$570,000 along the way. “We want our solutions to meet Bitcoin users’ actual needs and anticipate financial regulators constraints,” the company CEO, Pierre Gérard, explains. “We address Bitcoin activities while continuing to promote Research & Development on other blockchains providing smart-contracts implementation.”
The company recently launched a new Blockchain research initiative called FUNDCHAIN. The project examines how Blockchain technology could improve efficiencies, and create new business opportunities, within the investment fund industry. Ten of the world’s largest banks and financial services firms are founding members; BIL, BNP Paribas, CACEIS, European Fund Administration, HSBC, ING Luxembourg, Pictet, RBC Investor & Treasury Services, Société Générale Bank & Trust, and PwC Luxembourg.
“We believe this technology can help transform the way asset managers distribute their funds, reduce costs and speed up the investment process. It is great to see the industry coming together to seize these opportunities.”
- Alexandre Pirlet, BNP Paribas Securities Services
Luxembourg is one of the world's smallest countries, with only 576,000 inhabitants and US$57.8 billion in GDP for 2015. However, it’s become the leading global center for investment funds. The country's first fund was established in 1959. By May 2016, there were almost 3900, with net assets of approximately €3.5 trillion (US$3.9 trillion).
A recent report from Monterey Insight, an independent fund industry research company, shows that State Street is the largest Fund in the country, with total net assets of US$624 billion. The local J.P. Morgan division manages US$520 billion, while BNP Paribas looks after US$284 billion, and BNY Mellon US$278 billion.
The growing financial center was awarded the honor of Best Centre for Fund Administration at the Investment Week Fund Services Awards, held in London on October 4. The Awards celebrate cutting edge services and solutions in the fund management industry.
According to the Association of the Luxembourg Fund Industry, the official nonprofit representative body for the Luxembourg investment fund industry, the country has a unique concentration of investment fund experts specialised in all aspects of product development, administration and distribution.
Melinda Roylett, PayPal Senior Director and Head of EMEA Small and Medium Business, states that, “Many different international companies are headquartered here; that’s quite powerful.”
“The government is very proactive and interested in new technologies, such as the blockchain or alternative payments; and finally, the speed at which the financial centre moves is impressive.”
- Melinda Roylett, PayPal Senior Director and Head of EMEA Small and Medium Business
With blockchain technology reverberating around finance markets this year, it was only a matter of time until the technology took center stage in Luxembourg. “Blockchain technology has the potential to wipe Luxembourg off the map of the fund distribution and administration market,” Deloitte stated in a reportpublished last June.
Deloitte estimated that Luxembourg's fund distribution processing costs were €1.2 billion in 2014. In addition, 23 percent of the fund order process is handled manually, by fax, keeping the cost of distribution high and processing time low.
By automating processes and removing the need for intermediaries to distribute funds and process transactions, the firm believes that blockchain technology can help investment funds improve speed and efficiency, while reducing costs. Deloitte states that the technology will “particularly impact” financial service intermediaries, including transfer agents, fund registries, and fund administrators.
“The fund industry employs 14,000 people, many of them in areas that might be completely disrupted and partly or largely automated by the blockchain,” Deloitte warns. Failing to do so could see existing actors replaced by new entrants, “The country would lose is predominant position in the global fund industry.”
“Considering that the fund sector represents more than 50% of its economy, the Blockchain has the power of an earth quake that would shake to the ground the whole Luxembourg place.”
- Deloitte
However, further growth in Luxembourg's finance industry is widely anticipated following Britain's decision to leave the European Union. The CEO of Create Research, Amin Rajan, told the Financial Times that the companies will shift to Dublin and Luxembourg for retail funds, and Frankfurt and Paris for institutional funds.
New York City blockchain consultant, Rik Willard, told KPMG that Luxembourg has many advantages, and much in common with New York “in terms of creating a vibrant FinTech infrastructure.”
Willards’ company, Agentic Group, was selected by TIR Consulting Group LLC to provide blockchain guidance for “the Digital Luxembourg project.” TIR Consulting Group is working with Luxembourg to conceptualize and build new infrastructure to transform its economy. The Group's President Jeremy Rifkin said, “The Grand Duchy could become the ideal laboratory to test these innovative and clever ideas on a national scale.”
“In my mind, Luxembourg stands at the starting gate of major fundamental shifts that have the ability to create amazing financial innovations, develop a set of global standards for the industry, and unlock trillions of Euros in value — thus positioning itself for increased financial leadership in the 21st century.”
- Rik Willard, Agentic Group Founder & Managing Director
Luxembourg also happens to have a short but impressive history of bitcoin adoption. Bitstamp recently moved their European headquarters there, after exiting from Slovenia in 2015. The five-year-old Bitcoin exchange made headlines in April, when it became the first nationally licensed exchange.
Japan’s largest bitcoin exchange, Bitflyer, has an office in Luxembourg, as does SnapSwap, a recent startup known for its Gloneta payments-through chat app, and PayCash, which has been offering Europe a way to make everyday mobile payments since 2012, and added bitcoin to their platform in 2014.
The Netherlands-based Bitcoin payment service startup recently announced that it will enter the Mexican Peso and popular Japanese Yen markets. “In order to be able to provide you with the best Bitcoin and Altcoin to Mexican Peso service, we need your help!,” states the company.
Founded in March 2015, Bitwala aims to be a one-stop-shop for all kinds of bitcoin-to-fiat billpay solutions. The service currently supports SEPA payments, but has people from all over the world sending money to Europe.
Users can arrange a SEPA bank transfer to pay rent or a credit car bill., and send money to someone's email address. Although the service currently supports 17 fiat currencies, the service doesn’t cover bank accounts in most countries yet, including the US.
The European SEPA network operates across the 33-nation Eurozone countries’ banking network. The network charge is 0.5 percent per transaction, with a €1 minimum fee. Using the SWIFT payment network would cost Bitwala users a €15 euro minimum fee, and takes several business days.
The company received US$910,000 in seed funding last April, from KfW Banking Group and the Digital Currency Group, and has been busy developing the service every day since.
“One of our goals here at Bitwala is to make sending money abroad as easy, convenient, and secure for anyone.”
- Bitwala
The company launched it’s own Visa debit card in the same month. The card cost €1, and incurs the standard 0.5% fee. The card pulls local currency directly out of your Bitwala wallet bitcoin balance, and is accepted anywhere Visa is. The card requires the typicaly Know Your Customer documentation, sending them some sort of identification document and a copy of a utility bill, much like competitors cards from Shift and Bitpay.
A partnership with ShapeShift followed in July. Bitwala users can now pay bills, making transfers or topping up debit card using any one of the service’s 36+ cryptocunrrencies.
The company then launched the Bitwala messenger, a web app messenger that allows customers to interact and send money to each other, and their own bitcoin wallet. This has allowed debit card and bitcoin transactions from within the Bitwala site, simplifying the process. With the wallet at the center of their offering, their service works more like Coinbase’s bitcoin banking account in the US.
A string of further upgrades to the website were launched last month, including a full re-design with live on-site help, and now the company is steadily rolling new currency networks, and hinted on their blog about launching some sort of store as well.
The startup plans to offer a similar service to SEPA’s network, and the Yen is the first of the many fiat currencies their targeting, followed by the Peso. Bitwala is also offering a financial incentive to early adopters.
The European startup will send anyone with a Mexican or Japanese bank account five euros, while scoping out the average transaction time, according to Bitwala’s blog. There is no expiration date for the offer.
"Customers in Japan will be able to pay bills, send money or top up their Bitwala debit card with Bitcoin or any major Altcoins.”
- Bitwala
Japan is the country with the second largest volume of bitcoin trade globally, with global yen trading typically between two and four times as much as global USD volume. The growth started earlier this year, when the Japanese government stiplulated that the Financial Services Agency recognize bitcoin as an asset-like money. The Bank of Japan had several good things to say about bitcoin and blockchains at their latest settlement forum as well. Bitcoin trade volumes and news of merchants signing up have been gaining pace ever since.
The ‘Coincheck Electricity’ platform will be launching in November. The popular bitcoin exchange’s payments platform allows customers in central Japan, including Tokyo, to pay their electricity bills with bitcoin. There is even a rebate of 4 to 6 percent for payments in the cryptocurrency.
Bitcoin ATM machines have also popped up around the land of the rising sun. There are currently 11 ATMs showing on CoinATMRadar, seven in the Tokyo area alone. However, with nearly 200 of the world’s 800 bitcoin ATMs in Europe, Bitwala is used to the competition.
“We see a huge potential for Japan to open up to the innovative technology that lies within the blockchain and the wonders of using Bitcoin on a daily basis.”
- Bitwala
In Mexico, Bitwala’s competition may be a bit stiffer for consumer payments. Mexican payment processor MercadoPago started accepting Bitcoins into their platform used by 150,000+ merchants. Most of their retailers are online, however, such as WalMart, Groupon, HP, and Lenovo.
Only three bitcoin ATM machines are listed in Mexico on CoinATMRadar. Unfortunately, a bitcoin company that went out of business last summer, Sendbitcoin.mx, used to be able to send and receive bitcoins at any of 6,000 ATM machines nationwide. The company ceased business when the Mexican government temporarily made it illegal to send and receive bitcoins from outside of the country. The law has since been clarified to prevent large purchases, and ensure users are leaving an adequate paper trail for tax purposes.
The Bitcoin blockchain has long been touted as an alternative to legacy financial systems. Among a range of technological achievements, the peer to peer electronic cash system offers low fees and near instant transactions. However, the number of transactions processed by the network has been an ongoing source of contention.
Bitcoin can process around three to seven transactions per second. This number has often been compared to the VISA networks ability to process hundreds of thousands of transactions per second.
One way to provide more space for transactions and a higher maximum number of transactions per second is to increase the size of the blocks. The downside is a possible decrease in network security, as miners would earn lower fees. What to do, and how to do it has been a topic of discussion in the industry since blocks started approaching their maximum capacity.
The debate has inspired a range of solutions, some highly contentious and others widely accepted. Segregated Witnesses, better known as segwit, appears to be one of the few proposals with support from both sides.
“The Segregated Witness soft-fork (segwit) includes a wide range of features, many of which are highly technical.”
- Bitcoin Core
Segwit improves Bitcoin’s underlying protocol in many ways. It fixes transaction malleability, the large transaction signature verification Denial of Service attack, and provides a better way to upgrade the scripting system in the future.
It works by rearranging the individual transaction's format inside of each new Bitcoin block. After segwit is upgraded, they'll store the proof-of-work signatures (the witnesses) at the end of each bitcoin transaction's line, (segregating them) making them easier to ignore, and therefore allowing the file to be read faster. The signatures aren't needed for proof-of-work functions, and were basically slowing down the transactions per second that the network could do. Now they'll exist but not be in the way.
With this restructuring of bitcoin’s core framework, transaction malleability becomes impossible, and the maximum transaction speed can be up to four times faster. The process does add a new cost limit to ensure blocks remain balanced in their resource use, resulting in an effective limit closer to 1.6 to 2 MB.
The code was finished in April and a new version of Bitcoin Core with the segwit code is currently being finalized. Blockstream developer Greg Maxwell told Reddit readers on Tuesday that “It's pretty much ready.” The upgrade must be implemented by 95 percent of the bitcoin mining network for two consecutive weeksbefore it’s considered complete.
While this might offer temporary respite from fuller blocks, segwit also prevents a problem known as transaction malleability, where third-parties can currently modify the transaction slightly.
“The way the txid [transaction identifier] is calculated allows anyone to make small modifications to the transaction that will not change its meaning, but will change the txid. This is called third-party malleability.”
- Bitcoin Core
Bitcoin developer Marco Falke told BNC that the malleability fix helps various platforms building on top of Bitcoin, known as Layer Two, or L2, solutions. “While segwit is not strictly required for them,” Falke explained, it makes the development and deployment “significantly easier.”
Developer Nicolas Dorier told us that every layer two user would need to be running their own highly available full node without segwit. “This would hurt adoption quite a lot and increase cost.” Luke Dashjr was much more pointed. “Without segwit, any multi-transaction smart contracts for Bitcoin carry a risk of a counter-party holding your money hostage, so it's necessary for any decentralised L2 solutions, but not necessarily for centralised or trusted solutions.”
However, all four of the developers BNC talked to are looking forward to seeing the same layer two solution implemented. The Lightning Network is a scaling solution for Bitcoin that leverages segwit, and may end the blocksize debate all together.
“Lightning is a decentralized network using smart contract functionality in the blockchain to enable instant payments across a network of participants.”
- Lightning Network
Lightning implementations create a secure network of participants that can transact at high volume and high speed. The networks are, in essence, made up of numerous two party Bitcoin transactions known as payment channels.
Both parties contribute to the initial balance of the channel, and can create multiple transactions which alter the final payments, but they’re not individually broadcast across the bitcoin network. Only the most recent version can be broadcast to the blockchain, at any time and by either party.
By creating a network of these two-party ledger entries, it is possible to find various paths between participants. As a result, it’s possible to conduct limitless transactions that never have to be recorded in a block. “When you have truly scalable technology, there is no limit to how many transactions per second you can do,” Bitcoin developer Peter Todd explained. “It's like asking ‘With Windows 10, how many webpage documents can the whole world visit per second?’."
While the concept is yet to be proven outside of a test environment, and there are critics, enough developers are excited about the plan to have started several complementary projects. The Thunder network is a way to send smart contracts across Lightning Networks. Several reference networks for Lightning and builds in other programming languages exist too, such as Lightning and Eclair. All of which require segwit to be deployed first before they can work.
“With third-party and scriptSig malleability fixed the Lightning Network is less complicated to implement and significantly more efficient in its use of space on the blockchain.”
- Bitcoin Core
The most famous project is also the most developed. A successful test of Blockstream's C lightning prototypewas recently announced. “This is the first end-to-end test of a lightning micropayment network,” Blockstream engineer Rusty Russell said. Russell demonstrated the full path of the transaction on bitcoin’s testnet, including invoicing, multi-hop payment, and item delivery.
Mining hardware and infrastructure giant BitFury, a competitor to Blockstream, recently tested its’ own Lightning Network, called Flare. “After implementation of Flare, we expect to achieve performance of at least 400 tps per single payment channel, and more than 100,000 tps for network overall in our test environment by the end of July,” reads the company statement.
ACINQ conducted the testing, and the company CEO Pierre-Marie Padiou said that “Bitfury’s Flare is so far the most advanced proposal on routing, which is one of the major remaining challenges for the Lightning Network.”
However, Russell quickly responded with, “Their work shows how, by way of simple analogy, one can create a streetmap to get from A to B in an efficient way, while the test we've demonstrated here with v0.5 of the C lightning prototype has us actually walking that path on the street.”
Meanwhile, development of a smaller, open-source Lightning Network called Amiko Pay is also underway on Github, offering a “lightweight” alternative solution to BitFury and Blockstream’s lightning networks. The site says that, “All people could use Amiko Pay for all their daily transactions,” calling itself, “A scalable, de-centralized network for performing fast, secure, cheap and privacy-friendly electronic transactions.”
Joining the fray, and the bitcoin development world at the same time, internet entrepreneur Kim Dotcom recently announced his own version of the Lightning Network, called BitCache. While details remain scarce, the entrepreneur is attempting to raise $5 million in crowdfunding, where he described it as a “fix” for the bitcoin network that will take Bitcoin to the mainstream.
“MU2 and Bitcache will take #Bitcoin mainstream. I expect Bitcoin to hit the $2000 mark within 2 years.”
- Kim Dotcom
Segwit “brings huge benefits” to another Layer two project called JoinMarket, Falke added. He’s excited about the 2-year old project that acts as privacy app for bitcoin, and, in theory, doubles as a way to reduce the number of transactions that get stored to the blockchain. Dorier told us that he’s looking forward to Ethan Heilman’s TumbleBit, which processes bitcoin payments off-blockchain, similar to a lightning network, and keeps their origins completely anonymous.
Some other creative layer two projects follow behind segwit’s adoption as well, including Sidechains implementations from Blockstream and Rootstock, Paul Sztorc’s Bitcoin Hive Mind, and Peter Todd's OpenTimestamps.